Treasury boss Martin Parkinson has warned against betting on a continuous appreciation in the Chinese currency.
However, the Treasury secretary has welcomed the gradual liberalisation of the Renminbi (RMB) and the significant opportunities this will bring.
Dr Parkinson told the Australia-Hong Kong RMB Trade and Investment Dialogue in Hong Kong that Australia is working with Chinese authorities in their staged approach to reform.
Hong Kong remains an important testing ground as the financial gateway to China, but he said the growing trade and investment ties between Australia and China make Sydney a natural destination for the next RMB offshore hub.
"Australia has the benefit of the expertise of our local financial institutions as well as foreign banks," Dr Parkinson said.
The Sydney market boasts five major Chinese banks with branch status along with HSBC, which has long been active in the Australian market.
However, he said people shouldn't get ahead of themselves as China has an immensely challenging reform agenda, while dealing with the legacy of a highly managed system with many distortions.
Australia has first-hand experience of some of these challenges.
"While Australia's overall experiences with financial deregulation has been positive, the reforms of the 1970s and 1980s did not happen overnight," he said.
He said there is significant potential to further harness opportunities from China's financial opening.
"At the same time, we should be careful about believing in one-way bets, such as continuous RMB appreciation," he said.
Businesses need to be aware of the downside risks as well.
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